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COO – FORM 12

SUBJECT TITLE: LAW ON SALES and PLEDGE AND MORTGAGE

INSTRUCTOR: MARY PRINCESS JERMAINE N. CABARON, CPA
SUBJECT CODE: BL2

FINALS MODULE
LAW ON PLEDGE AND MORTGAGE

Topic 1 : PLEDGE AND MORTGAGE - GENERAL PROVISIONS

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Elaborate the essential requisites common to pledge and mortgage;

2. Define and explain pactum commissorium;
3. Elaborate the rules in the indivisibility of pledge and mortgage.

NOTES:

1.1. PROVISIONS COMMON TO PLEDGE AND MORTGAGE

ESSENTIAL REQUISITES COMMON TO PLEDGE AND MORTGAGE

The following essential requisites are common to pledge and mortgage:

a. That they be constituted to secure the fulfillment of a principal obligation;

b. That the pledger or mortgagor be the absolute owner of the thing pledged or
mortgaged;

c. That the persons constituting the pledge or mortgage have the free disposal of
their property, and in the absence thereof, that they be legally authorized for the
purpose;

d. That when the principal obligation becomes due, the things in which the pledge
or mortgage consists may be alienated for the payment of the creditor.

Third persons who are not parties to the principal obligation may secure the latter
by pledging or mortgaging their own property.

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 Any kind of obligation whether, pure or conditional, including natural, voidable and
unenforceable obligations may be secured by a contract of pledge and mortgage.

1.2. DEFINE PACTUM COMMISSORIUM

Pactum commissorium is a stipulation authorizing the creditor to appropriate the things

given by way of pledge or mortgage or to dispose of them. It is declared null and void
by law.

The amount of the loan is ordinarily much less than the value of the security.

The appropriation must be automatic without need of further act on the part of the
debtor. Hence, the prohibition does not apply to:

a. Subsequent voluntary act of the debtor of making cession of the property; or

b. A promise to assign or sell said property in payment of the debt.

1.3. RULES ON THE INDIVISIBILITY OF PLEDGE AND MORTGAGE

The following are rules apply in case of indivisibility of pledge and mortgage:

a. A pledge or mortgage is indivisible, even though the debt may be divided among
the successors in interest of the debtor or of the creditor;

b. The debtor’s heir who has paid a part of the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely
satisfied;

c. Neither can the creditor’s heir who received his share of the debt return the pledge
or cancel the mortgage to the prejudice of the other heirs who have not been paid;

d. The above rules do not apply where, there being several things given in mortgage
or pledge, each of them guarantees only a determinate portion of the credit. In
this case, the debtor shall have a right to the extinguishment of the pledge or
mortgage as the portion of the debtor for which each thing is especially answerable
is satisfied;

e. The indivisibility of a pledge or mortgage is not affected by the fact that the debtors
are not solidarily liable.

1.4. LEGAL EFFECT OF A PROMISE TO CONSTITUTE A PLEDGE OR

MORTGAGE

It gives rise only to a personal right binding upon the parties but it creates no legal right
in the property.

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Exercises:

I. Application.

1. Differentiate Pledge with Mortgage.

2. What does indivisibility have to do with pledge and mortgage?

3. Why does pactum commissorium declared null and void by law?

4. What does it mean that pledge and mortgage does not give rise to legal right on the
property?

5. Why does the amount of the loan lesser than the amount of the security?

-END OF TOPIC 1 OF FINALS MODULE-

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Topic 2 : PLEDGE

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Elaborate the definition of contract of pledge;

2. Identify and explain the rights of the pledgee;
3. Identify and explain the obligations of the pledgee;
4. Elaborate the rules on the proceeds after the sale of the thing pledged;
5. Elaborate the rights of the pledgor;
6. Identify and explain the obligations of the pledgor; and
7. Identify and elaborate the reasons of extinguishment of pledge.

NOTES:

2.1 CONTRACT OF PLEDGE

Pledge is a contract by virtue of which the debtor delivers to creditor or to a third

person a movable, or instrument evidencing corporeal rights, for the purpose of
securing the fulfillment of the principal obligation with the understanding that when
the obligation is fulfilled the thing delivered shall be returned with all its fruits and
successions.

It is a real, accessory, and unilateral contract. It is also a subsidiary contract because

of the obligation incurred does not arise until the fulfillment of the principal obligation
which is secured.

It is necessary in order to constitute the contract of pledge, that the thing pledged be
placed in the possession of the creditor, or of a third person by common agreement.

2.2 THING PLEDGES MAY BE ALIENATED

Thing pledged may be alienated. The pledgee must give his consent to the sale.
Ownership passes to the vendee but subject to the rights of the pledgee.

2.3 RIGHTS OF THE PLEDGEE

The following are the rights of the pledgee:

a. To retain the thing in his possession or in that of the third person to whom it has
been delivered, until the debt is paid.

b. To be reimbursed for expenses incurred in its preservation.

c. To compensate (set-off) the fruits, income, dividends or interests earned or

produced by the thing pledged and received with those which are due to him.

d. To bring the actions which pertain to the owner of the thing pledged in order to
recover it from, or defend it against, a third person.

e. To sell the thing pledged at public auction, if without his fault, there is danger of
destruction, impairment of diminution of the value of the thing.

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 f. To claim a substitute or demand immediate payment, if he is deceived in the
substance or quality of the thing pledged.

g. To sell the thing pledged at public auction if the obligation secured is not paid.

h. To bid at the public sale.

i. To collect the amount that becomes due on a credit pledged before such credit is
redeemed.

j. To choose which one of the several things pledges shall be sold.

2.4 OBLIGATIONS OF THE PLEDGEE

The following are the obligations of the pledgee:

a. To take care of the thing pledged with the diligence of a good father of a family.

b. To answer for its loss or deterioration in the proper case.

c. Not to deposit the thing pledged with a third person unless authorized.

d. To be responsible for the acts of his agents or employees with respect to the
thing pledged.

e. Not to use the thing pledged unless authorized or its preservation so requires.

f. To advise the pledgor, without delay, of any danger to the thing pledged.

g. To promptly advise the pledgor or owner in case of a sale at public auction of

the result thereof.

h. To return the thing pledged when the principal obligation is paid.

2.5 EXTRA-JUDICIAL FORECLOSURE SALE OF THE THING PLEDGED

The following are the conditions required in an extra-judicial foreclosure sale of the thing
pledged

a. The debt is due and unpaid;

b. The sale must be at a public auction;

c. There must be notice to the pledgor and owner, stating the amount due; and

d. The sale must be made within the intervention of a notary public.

The pledgee may appropriate the thing pledged if after the first and second auctions,
the thing is not sold. If the creditor appropriated the thing, it shall be considered as full
payment for his entire claim. He is thus obliged to give an acquittance for the same.

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2.6 RULES OF THE PROCEEDS AFTER SALE OF THE THING PLEDGED

If the price of the sale is more than the amount due, the debtor is not entitled to the
excess, unless otherwise agreed.

If the price of the sale is less than the amount due, the creditor is not entitled to recover
any deficiency, notwithstanding any stipulation to the contrary.

2.7 RULES ON THE PROCEEDS AFTER SALE OF THE THING PLEDGED

(AS DISTINGUISHED FROM MORTGAGE)

Mortgage More Creditor is not entitled to the

excess
Chattel Mortgage More Creditor is not entitled to the
excess
Pledge More Creditor is entitled to the excess
unless otherwise stipulated

Mortgage Less Creditor can recover the

deficiency
Chattel Mortgage Less Creditor can recover the Except in case of
deficiency Recto Law
Pledge Less Creditor cannot recover the Except in case of
deficiency even if there is legal pledge
stipulation

2.8 RIGHTS OF THE PLEDGOR

The following are the rights of the pledgor:

a. Continue to be the owner of the thing pledged, until its sale, unless it is
expropriated;

b. To demand the deposit of the thing pledged should the creditor use it without
authority, or misuse it in any other way;

c. To substitute the thing pledged if it is endangered without fault of the pledgee

without prejudice to pledgee’s right to have the thing sold at public sale;

d. To bid and have preference at the foreclosure sale if he should offer the same
terms as the bidder;

e. To demand the return of the thing pledged upon the extinction of the principal
obligation.

2.9 OBLIGATIONS OF THE PLEDGOR

The following are the obligations of the pledgor;

a. To notify the pledgee of any flaw or defect of the thing pledged known to him;
otherwise, he answers for damages suffered by the pledgee;

b. To reimburse the pledgee for expenses made for its preservation;

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 c. To fulfill his principal obligation.

2.10 CAUSES FOR THE EXTINGUISHMENT OF PLEDGE

The following are causes of extinguishment of pledge:

a. Return of the thing pledged by the pledgee to the pledgor or owner, any
stipulation to the contrary being void;

b. Renunciation or abandonment executed in writing by the pledgee even without

return of the thing;

c. Destruction or loss of the thing pledged;

d. Extinction of the principal obligation by payment or sale of thing pledged; and

e. Other causes of extinguishment of ordinary obligations.

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Exercises:

I. Application.

1. Elaborate the unique characteristics of Contract of pledge.

2. What does it mean that the thing pledged may be alienated?

3. What are the rights of a pledgee?

4. What are the robligations of a pledgee?

5. What happens with the proceeds after the thing pledged was sold?

6. What are the rights of a pledgor?

7. What are the obligations of a pledgor?

-END OF TOPIC 2 OF FINALS MODULE-

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Topic 3 : MORTGAGE

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Elaborate the definition of contract of mortgage;

2. Identify the effects of mortgage;
3. Elaborate the definition of Foreclosure and Redemption.

NOTES:

3.1 MORTGAGE

Contract of Mortgage

A contract of mortgage is an accessory contract whereby the real property is made the
security for the fulfillment of a principal obligation.

It is a real, accessory, unilateral and subsidiary contract.

3.2 EFFECTS OF A MORTGAGE

Mortgage creates a real right. It directly and immediately subjects the property upon
which it is imposed, whoever the possessor may be, to the fulfillment of the obligation
for whose security it was constituted.

The mortgage (creditor) may, therefore, demand payment from any possessor of the
mortgaged property; he may alienate or assign the mortgage credit (his right as
mortgagee) to a third person.

The mortgage does not extinguish the title of the mortgagor (debtor) who does not,
therefore, lose his right to dispose of the mortgaged property. The law considers void
any stipulation forbidding the owner from alienating the property mortgaged.

3.3 FORECLOSURE

Foreclosure is the remedy available to the mortgagee by which he subjects the

mortgaged property to the satisfaction of the obligation to secure which the mortgage
was given through the sale of the property at public auction and the application of the
proceeds thereof to the payment of his claims.

There are two kinds of foreclosure: judicial and extrajudicial.

In judicial foreclosure, a mortgage may be foreclosed judicially by bringing an action for
that purpose in the Regional Trial Court of the province or city where the real property
or any part thereof lies. A mortgage may be foreclosed extrajudicially where there is
inserted in the contract a clause giving the mortgagee the power upon default of the
debtor to foreclose the mortgage by an extrajudicial sale of the mortgaged property.

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3.4 REDEMPTION

Redemption may be defined as a transaction by which the mortgagor reacquires or buys

back the property which may have passed under the mortgage or divests the property
of the lien which the mortgage may have created.

Exercises:
I. Application.

1. Cite an example with contract of mortgage.

2. Explain Foreclosure.

3. Explain redemption.

-END OF TOPIC 3 OF FINALS MODULE-

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Topic 4 : CHATTEL MORTGAGE

LEARNING OBJECTIVES:

At the end of this topic, the students are expected to:

1. Elaborate the definition of Contract of Chattel Mortgage;

2. Explain affidavit of good faith;
3. Identify and explain the requisites to form a contract of chattel mortgage.
4. Identify the objects that may be subject to chattel mortgage;
5. Explain foreclosure in a Contract of Chattel Mortgage.

NOTES:

4.1 CHATTEL MORTGAGE

Contract of Chattel Mortgage

Chattel mortgage is a contract by virtue of which personal property is recorded in the

Chattel Mortgage Register as a security for the performance of an obligation. If the
chattel mortgage is not recorded, the mortgagee acquires the right to demand
registration of the contract.

Chattel mortgage is an accessory, unilateral and formal contract.

4.2 AFFIDAVIT OF GOOD FAITH

It is an oath in a contract of chattel mortgage wherein the parties severally swear that
the mortgage is made for the purpose of securing the obligation specified in the
conditions thereof and for no other purpose and that the same is a valid obligation and
one not entered into for the purpose of fraud.

The absence of the affidavit vitiates a mortgage only as against third persons without
notice, like creditors and subsequent encumbrances. In other words, they are not bound
by the mortgage.

4.3 REQUISITES TO FORM CONTRACT OF CHATTEL MORTGAGE

The following are the requisites to form a chattel mortgage contract:

a. It must be signed by the mortgagor

b. It must be signed by two witnesses

c. It must contain an affidavit of good faith

d. It must contain a certificate of oath

e. It must substantially comply with Sec. 5, Act No. 1508

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4.4 OBJECT OF CHATTEL MORTGAGE CONTRACT

The following may be made the object of chattel mortgage contract:

a. Interest in business

b. Ungathered products or growing crops

c. Vessels

d. Shares of stock

e. Machinery placed by a tenant in plant belonging to another

4.5 LAWS THAT PRINCIPALLY GOVERN CHATTEL MORTGAGE

The following laws principally govern chattel mortgage:

a. Chattel mortgage law (Act No. 1508)

b. New Civil Code

c. Administrative Code

d. Revised Penal Code

4.6 FORECLOSURE OF CHATTEL MORTGAGE

Foreclosure of chattel mortgage may be judicial or extrajudicial. Judicial foreclosure is

done by instituting a court action. In extrajudicial foreclosure, the object mortgage sold
by the mortgagee at public action.

After payment of the debt or the performance of the condition specified in the chattel
mortgage, the mortgagee must discharge the mortgage in the manner provided by law,
otherwise he may be held liable for damages by any person entitled to redeem the
mortgage. If the mortgagor defaults in the payment of the secured debt or otherwise
fails to comply with the conditions of the mortgage, the creditor has no right to
appropriate himself the personal property because he is permitted only to recover his
credit from the proceeds of the sale of the property at public auction through a public
officer in the manner prescribed in Section 4 of Act No. 1508.

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Exercises:

I. Application.

1. What makes a chattel mortgage unique compared to pledge and mortgage?

2. What may be a probable object in a contract of chattel mortgage?

3. What are the requisites to form a chattel mortgage?

4. What is the importance f an affidavit of good faith?

5. When does foreclosure in a chattel mortgage happen?

-END OF TOPIC 4 OF FINALS MODULE-

END OF FINALS MODULE.

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 REFERENCE

Rosada, F. (2017). Regulatory Framework for Business Transactions Reviewer.

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